Robert Siegel speaks with Bill Gross, founder of Pimco, the largest fixed-income bond fund in the world, about his thoughts on how the debt ceiling tangle in Washington is reflected in the marketplace.

ROBERT SIEGEL, Host:

Back in March, the founder of PIMCO, the biggest bond investor, described the U.S. government's level of debt as placing it in the category of a double-A nation moving toward a single-A. Bill Gross said that. He explained to us then that treasuries with average yields around 2 percent just weren't worth it. PIMCO had gone in a couple of months from owning, in its biggest mutual fund, $25 billion worth of U.S. government-related securities - 12 percent of that fund - down to holding zero.

Well, Mr. Gross joins us once again from Newport Beach, California. Thanks for joining us once again.

BILL GROSS: You're welcome. Thanks for having me, Robert.

SIEGEL: And first, does what is happening - or not happening - in Washington now about the debt make U.S. government-related securities any less attractive to PIMCO?

GROSS: Well, certainly, if the rating agencies, whether it's Standard Poor's or Moody's or Fitch - there are three of them - downgrade U.S. treasuries, then the market itself will take notice. And many institutions, whether they be insurance companies, money market funds or perhaps even the Chinese, who hold substantial amounts, may in some cases be forced to sell them and in other cases, think twice about holding them. So there would be a significant impact, in our view, in terms of higher yields and lower prices.

SIEGEL: But what you told me back in March was that the only problem you had with treasuries was their yields. You felt they were too low. If they went up as the result of a default and suddenly the U.S. had to pay more, would you then find U.S. treasuries ironically more attractive after the U.S. became a deadbeat?

GROSS: Well, I think so. I mean, investments are a function of price; they're a function of risk and return. And to the extent that the return was improved by higher yields, PIMCO would be attracted, I think, by a 50 basis point or a half a percent higher yield on a 10-year Treasury, now about 3 percent. If they went up to 3 and a half percent, then a double-A type of nation such as the United States, in our opinion, would be an attractive investment at those yields.

SIEGEL: So at this point, as you say, as long as the U.S. is getting away with a rating that you think we really don't deserve, treasuries aren't attractive. But if the U.S. actually manages to blow through the debt ceiling, that's a different story. The treasuries might be more attractive at 3 percent.

GROSS: Well, I think so. I don't mean to suggest that we hope that they blow through the credit rating. That's not up to us. It's up to the rating agencies and ultimately, as you know, up to the Congress and the executive, in terms of what they do. But there are countries, Robert, such as Canada and such as Australia, that offer higher yields than the United States, and that have triple-A ratings as well, but lower debt as a percentage of GDP.

These are countries - what we call, having cleaner dirty shirts. You know, many sovereign nations around the world basically have debt problems, but there are some with fewer problems than others. And countries such as Canada and Australia, Germany as well, you know, offer more attractive yields in a cleaner dirty shirt.

SIEGEL: Mr. Gross, how do you explain to people the apparent indifference so far of the markets to the fairly obvious political disarray in Washington over the debt?

GROSS: Well, I would agree with you in terms of the equity markets - stable since last Friday, when the alarm was sounded by President Obama. The bond markets as well, relatively stable in terms of their yields. But I would point out that the dollar itself, which is a fundamental reflection of the credit worthiness of the United States, is at its lowest trade-weighted floor for the past 15 years. And commodities such as gold and oil and other hard commodities, which are a reflection of a weaker dollar, are doing just that; they're going up in price.

SIEGEL: But you're saying that the investor who looks at his or her holdings and says, well, I seem to have about the same number of dollars, or a little bit more, in my portfolio of stocks, and the same number in my bonds - might be accurate. But if each of those dollars is worth less today than it was a few months ago, it's taken a hit.

GROSS: Well, that's certainly the case. That's one of the problems in the United States. We're not a currency savvy nation, like nations in euro land are because their history, of course, is one in which they were forced to cross borders to make transactions; and there were a multitude of currencies. And I think Americans need to take a course, in terms of the valuation of the dollar and how it affects their purchasing power, as you pointed out.

SIEGEL: Bill Gross, thank you very much for talking with us once again.

GROSS: Thank you, Robert. Nice to be here.

SIEGEL: Bill Gross, the founder of PIMCO, the big bond investor, spoke to us from Newport Beach, California.

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